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Wednesday, August 31, 2016

It's a sad day when economic commentators like me have to spend so much time explaining what's wrong or misleading about the things the federal Treasurer says, rather than backing up his efforts to educate the public on economic realities and helping him fight for sensible though unpopular policies.

To be fair, Scott Morrison did have useful points to make in his big speech last week, his first major contribution since the election.

But then he veered off onto reinforcing the mythology of the greedy well-off, who resent being taxed to help those less fortunate than themselves.

He announced there was a new divide in the community – "the taxed and the taxed-nots".

"A generation has grown up in an environment where receiving payments from the government is not seen as the reserve of those who unfortunately will be forever dependent on support or in need of a hand up, but a common and expected component of their income over their entire life cycle," he said.

"On current settings, more Australians today are likely to go through their entire lives without ever paying tax, than for generations.

"More Australians are also likely today to be net beneficiaries of the government than contributors – never paying more tax than they receive in government payments."

Get it? Here are you and I, working hard all our lives, having far too much of that income taken off us in tax. Yet out there somewhere, living in suburbs we rarely visit, is a growing army of bludgers who don't bother working, but find some way of conning the government into paying their way.

Now, apparently, a lot more of them will go their entire lives without paying more in tax than they get back in benefits.

This is self-pitying fantasy. It's not the disadvantaged we should feel sorry for, it's you, slaving away in Mosman or Brighton.

It's an imaginary picture of the world. It's the conspiracy theory you'd expect from One Nation, not the federal Treasurer.

It's built on a few simple tricks. It hopes you won't remember that Australia's social security system is the most tightly means tested among the developed countries, paying flat amounts that aren't at all generous – which is the main reason we pay less tax than most.

And it hopes you won't remember that we pay many more taxes than income tax. Personal income tax accounts for only a little over half the federal taxes we pay. Add in state and local taxes, and income tax accounts for 40 per cent of all taxes.

So the notion that people who don't work don't pay tax is silly. Even taking account of benefits received, next to no one goes through their life being "taxed-not".

It's true we spend almost $160 billion a year on social security – most of it going on pensions and benefits – which accounts for more than a third of all federal spending.

Official figures show there are about 5.2 million recipients of federal "income support". So who are these bludgers? People on the dole? They account for just 13 per cent.

Sole parents? They're 5 per cent. People at home being "carers"? Just 4 per cent.

I know, all those people faking bad backs on the disability support pension. Sorry, that's only 16 per cent.

So where are the rest of the people not pulling their weight and expecting us to support them? Well, half the people on income support are people on age or service pensions.

Oh. You mean the people who keep saying they're entitled to the pension because they "paid taxes all their lives". The people whose investment advisers helped them have lots of other income, but still get the pension.

And that doesn't count all the retired people paying no income tax on their income from superannuation, at present no matter how huge.

Nor does it count all those bludging parents getting the family tax benefit or those bludging mothers expecting us to help with the cost of childcare so they can go to work.

Family benefits and childcare subsidies account for more than a quarter of federal spending on pensions and benefits.

What, not quite so many lazy loafers as you expected?

The Australian Bureau of Statistics conducts a study where it attempts to allocate as many taxes as possible from all levels of government to each of Australia's 8 million-plus households, while also allocating as many cash and in-kind benefits as possible from all governments.

Morrison ought to look at the most recent study, for 2009-10, particularly page 41. It shows that whether we pay more to the government than we get back in benefits changes as we move through the life cycle.

It shows that, on average, single people of working age pay a lot more than they get back, as do couples without dependent kids.

Couples with a few kids pretty much break even or get back a bit more than they pay, but the people who really clean up are the retired.

Elderly couples are ahead to the tune of about $690 a week, on average, with elderly singles getting $475 a week, mainly because they pay little income tax but get huge health benefits along with the pension.

Monday, August 29, 2016

There are few topics on which there's more irrational thinking than foreign investment. Trouble is, the illogic comes as much from economists and policy makers as it does from uncomprehending punters.

Sometimes I think the wonky thinking by the economic literates is an overreaction to the crazy prejudices of the economic illiterates.

The punters think we can decide not to sell off the farm – not to allow foreigners to buy Australian businesses – without that having any economic consequences. Without the decline in foreign capital inflow leading to slower economic growth and a slower-rising material standard of living.

Of course, there's no reason the electorate shouldn't decide to trade off less foreign ownership for a standard of living that's lower than it could be, provided people understand the price they're paying.

The econocrats go the other way, exaggerating our dependence on foreign investment and other capital inflow.

Econocrats have the knowledge that we're a "capital-importing country" burnt into their brains. They live in eternal fear that one wrong move could reduce the inflow to a trickle, stuffing us completely.

They preach the need for us to attract more foreign investment even while they worry that the dollar's too high – another example of how long it's taking economists to adjust their "priors" (long-held beliefs) to a world of floating exchange rates.

I can't think of a time when we've had too little foreign investment. Even when the dollar briefly fell below US50¢ in 2000 there was no obvious problem.

Another silliness about the econocrats' conviction that we can never have enough foreign investment is their assumption that prices – specifically, the rates at which various taxes are set – will be the overwhelming factor determining how much we get.

Treasury continually lectures us on how globalisation has made it easier to move financial capital between tax jurisdictions, thus making the quest for foreign investment far more "competitive".

This, we're assured, makes it imperative we have tax rates that are competitive with far less attractive investment destinations, including developing countries a fraction of our size, where cronyism and corruption are rife, and you can't be sure of getting fair treatment in the courts.

Only economists, mesmerised by their model – which ignores all factors that can't be measured in dollars – would be silly enough to imagine that decisions about where in the world to set up business would be made without reference to non-quantifiable factors.

That global companies such as Google or Apple would refuse to do business in Australia because our company tax rate is higher than Singapore's.

Yet the need to be more price-competitive in the quest for foreign investment is advanced as almost the only argument needed to justify a cut in company tax. That there'd be nothing in it for domestic shareholders is treated as beside the point.

John Howard's decision in 1999 to discount by half the rate of tax on capital gains was justified on the grounds that it would attract lots of investment by foreign fund managers. Never mentioned again.

In their revulsion against the public's "economic nationalism", the econocrats have gone to the opposite extreme of assuming all foreign investment is good and we can never get enough.

When it suited the world's big mining companies to come to Oz and engage in a decade-long frenzy to build more mines before China went off the boil, it never occurred to our policy makers to make the miners form an orderly queue.

Rather, we let them turn our economy upside down. We saw our job as ensuring the miners' frenzy didn't cause an inflation surge, using high interest rates and tolerating a hugely overvalued exchange rate to suppress the non-mining economy and allow the miners to get all the resources they wanted.

We did lasting damage to our manufacturing and tourism industries to allow the miners to have their rowdy party.

We're left with a huge, capital-intensive, 80 per cent foreign-owned mining industry that employs just a handful of Australians.

Its foreign ownership wouldn't matter so much if it was paying its fair whack of tax. But we let the miners con us out of imposing a sensible resource rent tax, and now we discover they're turning legal somersaults to minimise the company tax they pay.

The econocrats have become so defensive towards foreign investment they've forgotten the most basic reason for having and managing an economy: self-interest.

Foreign investment is a means, not an end. It's not our job to make our economy a playground for foreign companies.

We should welcome them and tolerate their self-interested, rent-seeking behaviour only to the extent that it leaves us better off.

Sunday, August 28, 2016

If foreign investment in Australian businesses is so unpopular with so many people and such a hot potato for Malcolm Turnbull and his government, why do we persist with it?

Short answer: because we prefer our material standard of living to go up, not down.

This week an Essential poll revealed the full extent of the public's reservations about foreign investment. Foreign investment in mining was regarded as "bad for the economy" by 28 per cent of respondents.

For investment in ports it was 37 per cent and for investment in agriculture it was 44 per cent. For investment in infrastructure such as electricity it was 45 per cent and for investment in real estate it was 54 per cent.

The most opposed to foreign investment were voters for minor parties such as One Nation and the Xenophones​, but Greens voters weren't far behind. Then came Labor voters and, finally, voters for the Coalition.

But even among Coalition supporters there were almost always more saying it was bad than saying it was good.

When you remember that our level of material prosperity has been dependent on foreign investment since the arrival of the First Fleet, it's a wonder so few punters can join the dots.

Viewed through economic eyes, the First Fleet was just the arrival in this country of its first foreign investor, in boats laden with labour, materials and supplies, intent on getting a new subsidiary going.

There were a lot of imports with, on the other side of the transaction, an inflow of foreign capital owned by the British government.

The term's gone out of fashion, but since white settlement Australia has always been a "capital-importing country".

To develop a country economically you need lots of money - known here as financial capital - to pay for all the construction and equipment, known as physical capital. Where does this money come from? Someone has to save it by not consuming all their income.

Ideally, all the savings necessary to finance the economic development of our country would come from Australians. Then we'd own everything ourselves and all the profits would belong to us.

But we've always had a small population relative to the huge opportunities to farm our land, exploit our untold mineral wealth and develop our economy in many other respects, such as making ourselves an attractive destination for tourists and university students.

So, from the beginning, we've always invited foreigners to bring their savings to Australia and help us develop our economy much faster than we could if we relied solely on our own savings. That's what makes us a capital-importing country.

The attraction to the foreigners is that they own the businesses they build and keep the profits they make.

The attraction to us is we get a bigger economy than we otherwise would. The foreign firms provide a lot of employment for Aussies, buy a lot of their supplies from local businesses and, of course, pay tax to our government on their profits.

That's always been the deal. Had we kept the foreigners out, our economy and population would now be much smaller than they are and, in consequence, our standard of living would be much lower than it is.

At first the foreigners most willing to invest in Oz were the Brits. Then it was the Americans, then for a few decades the Japanese, and now the Chinese.

I'm old enough to remember when it was American investment that people objected to when we first started worrying about "selling off the farm".

But when the Japanese economy was riding high in the 1970s and '80s, and Japan began looking for profitable investments here, I remember how much the farmers carried on. They thought Japanese feed lots were the beginning of the end of Oz.

The Japanese came and stayed and eventually the farmers realised they were no threat. But now it's the Chinese, and farmers are back to manning the barricades. They're going to dig up our farms and take them back to China.

You know they will because their skin's a different colour. Or maybe they'll sabotage the communications and power networks they now own, just before they invade us.

The globalisation of financial markets has made it much easier for money to move between countries and thus complicated the picture I've just described.

These days, we can borrow foreigners' savings, not just let them set up new businesses here. And it's easier to sell them existing businesses.

It's easier for foreigners to buy some shares in listed Australian companies (known as "portfolio investment") rather than acquiring a controlling interest in a new or existing business ("foreign direct investment").

Before globalisation, countries tended to be either owners of many foreign businesses ("equity capital") or to have a lot of their businesses owned by foreigners. They either owed a lot of money ("debt capital") to foreigners or foreigners owed them a lot of money.

These days, every country does a lot of both. At March this year, we owed $2126 billion to foreigners, while foreigners owed us $1098 billion, leaving us with net foreign debt of $1028 billion.

Foreigners had equity investments in Oz worth $996 billion, while we had equity investments in other countries worth $1012 billion, leaving us with net foreign equity assets of $16 billion. You read that right.

But if this makes you think we'd be better off borrowing all the savings we need rather than selling off the farm, remember this final complication: foreign direct investors in Australian businesses don't just bring their savings, they also bring their managerial skills and often their more advanced technology, which Australian workers learn to use and then take on to local businesses.

And in this ever more integrated world, foreign investment and international trade tend to go together. Going for trade without investment is another way to be poorer than necessary.

Wednesday, August 24, 2016

There are a lot of nice people in the world, people who worry about all the debt we're leaving to our kids and grandkids. I know this from the letters I get from people.

I got an email from a retired couple who said they'd be happy to pay more – a 15 per cent goods and services tax, medical co-payments or even a 10 per cent increase in income tax – if only it was guaranteed that the money was spent "to pay down debt, not rack up more with populist promises".

Unfortunately, there are no nice people in politics. Or, if a few start out that way, they soon get it beaten out of them.

Last week, in his first big speech since he was re-elected – the one so rudely interrupted by some woman who thought the mistreatment of asylum seekers on remote islands was something worth drawing to our attention – Malcolm Turnbull decided to tug on the heartstrings of nice people everywhere.

"We sing Advance Australia Fair," he said, "but there's nothing more unfair than saddling our children and our grandchildren with mountains of debt that we have created because our generation could not live within its means.

"If we aren't prepared to make the tough choices today – younger Australians, future generations, will be forced to pay back the debt through a combination of higher taxes and a lower quantity or diminished quality of government services. In short, through lower living standards than they would otherwise have enjoyed."

Sorry, but that's not true. It's roughly the opposite of the truth. And I don't believe someone as smart as Turnbull actually believes it.

But before we go on, how's this for one of the "tough choices" about fairness Turnbull wants our elected representatives to agree to in this year's budget: cutting the dole – which is a princely $38 a day – and other welfare payments by $4.40 a week, while agreeing to tax cuts of $6 a week for people earning more than $87,000 a year.

The justification for the cut in benefits is that it represents the belated removal of the "energy allowance" originally paid in compensation for the carbon tax. Since Tony Abbott abolished that tax, the allowance is no longer needed.

Now that is a tough choice. Is it fair to cut the benefits of low income-earners because we're "living beyond our means" while we cut the taxes of high income-earners?

But are we living beyond our means? What does that phrase mean, anyway?

Is any person or government that's borrowing money living beyond their means? That's what the politicians who keep repeating that line hope we'll assume.

A moment's reflection reveals its weakness. Say your offspring borrow a frighteningly large amount so they can live in a home of their own. Does that mean they're living beyond their means?

No, of course not. Not if they can afford the repayments. And not when you remember that the house they've bought will deliver them a flow of services for as long as they own it.

What service? It's providing them with somewhere to live – and thus relieving them of the expense of renting.

If I told you of a couple with a debt of $600,000, would you automatically assume they had nothing to show for that debt? No, you'd assume they must have bought a house and may well have made a sound investment.

But when politicians tell us the government owes many billions of dollars, many of us assume there's nothing to show for all that spending and borrowing. Which is just what game-playing politicians hope we'll assume.

But it's usually not true. What do governments have to show for all their borrowing? Public infrastructure – roads and motorways, bridges, railways and bus fleets, hospitals and schools, prisons and police stations and all manner of other facilities.

All those things contribute to our standard of living and to the efficiency of our economy. Do you think we'd be better off had the money not been borrowed and those things not been built?

Since we worry about our children and grandchildren, what kind of physical Australia do we want them to inherit? One with rundown and inadequate public facilities – one where it's really hard to get around, where roads and trains and hospitals and schools are grossly overcrowded?

If we continue letting our politicians demonise public debt, that's the world we'll be leaving for our descendants.

It's true we'll be leaving debt to our children. But we'll also be leaving them a better equipped, better educated and healthier Australia. Does this add up to something to worry about or feel guilty over?

According to the federal budget papers, almost all of the expected underlying cash deficit of $37 billion this financial year will be spent on infrastructure.

Most infrastructure spending is done by the state governments. Much of what they spend each year building facilities that will serve the community for 30 or 40 years or more is covered by that year's tax revenue (including federal grants), the rest is borrowed – to be serviced and repaid by the people who'll still be using those facilities.

It's the self-same bargain that was made with our generation. Sounds a fair and sensible way to keep building a better future.

Monday, August 22, 2016

Disheartening times are times for fresh thinking. The voters' effective rejection of conventional economic solutions at the election require our economists and policy makers to go back to the drawing board.

It's always tempting to blame the salesman for his failure to make a sale but, of late, that argument is wearing thin. It's more useful to ask whether sales would be more forthcoming if we improved the product.

Everyone accepts the importance of innovation and agile thinking but, as with most professions, it doesn't come easy to economic practitioners.

They need to go back over their thinking, looking for factors they may have missed or conclusions that aren't as solid as they've long assumed.

One simplifying assumption economists have long relied on is that "equity" and "efficiency" are in conflict. The things you could do make the economy fairer come at the cost of reducing incentives and causing the economy to grow more slowly.

Conversely, the things you could do to improve incentives and growth will, regrettably, make the economy less fair.

On this, however, the tide of international opinion is turning. Several studies by economists at the International Monetary Fund and the Organisation of Economic Co-operation and Development find that increased inequality of income leads to slower economic growth.

If this advance in understanding of ways to encourage growth has filtered through to "the government's chief economic advisers" in Treasury, we've yet to see any sign of it.

But the message hasn't been lost on the Labor Party's think tank, the Chifley Research Centre. In a paper prepared for the centre, Equity Economics, a consultancy, explains the two mechanisms by which inequality can dampen economic growth.

First, the more of the growth in income that's captured by high income earners, the less income that flows back into consumption.

This is because high-income households tend to save a much higher proportion of their income than do middle and particularly low-income households.

It's clear this is a big problem in the United States, where a quite amazing proportion of income growth is being captured by the top few percent of households.

It would be a significant factor in helping to explain America's low rate of growth in recent decades.

It's not such a big factor in Australia yet, but it will be if we let our top few percent continue increasing their share at the rate they have been.

The second mechanism by which inequality dampens economic growth is longer term. Lower growth in the incomes of families towards the bottom of the distribution limits their ability improve their knowledge and skills by investing in their own education.

The same applies when governments shifting more of the cost of healthcare on to out-of-pocket payments discourage workers from doing all they should to protect their health.

The Gini coefficient measures income inequality on a worsening scale from 0 to 1. Modelling by the OECD has found that a reduction of 1 percentage point in the coefficient will cause the level real gross domestic product in 25 years' time to be up to 5.7 per cent higher than otherwise.

To err on the conservative side, Equity Economics caps the increase at 3 per cent, before comparing it with modelling exercises showing that the national competition policy reforms of the 1990s raised the level of GDP by 2.5 per cent, and that the combined preferential trade agreements with Japan, South Korea and China will raise the level of GDP by just 0.1 per cent over the long term.

Now, I never take such modelling results too seriously. They rest on too many unstated and debatable assumptions. But the comparison does suggest there's a lot to be gained by taking steps to halt the continuing widening of the gap between high and low income-earners.

So what sort of reforms could be made to improve growth in this way?

Of the paper's five suggestions, the top two are, first, improve access to quality education to increase economic and social mobility, starting with early childhood education, right through to needs-based student funding and affordable higher education.

Second, improving labour outcomes for women, through flexibility in childcare options, paid parental leave and reducing the gender pay gap so that returning to work is financially viable.

Clearly, such reforms are very different from those that economists have been pursuing – with so little acceptance by voters.

Although their cost could be covered by equity-enhancing tax reforms – affecting negative gearing, the capital gains tax discount, superannuation and the taxation of multinational companies – they require policy makers to be more agile in their thinking than they've been to date.

Saturday, August 20, 2016

You don't need me to tell you we lucked out when we sited our island continent not too far from China. But will our luck hold?

Or, more pointedly, what do we have to do to ensure we stay lucky?

A major report, released this week, Partnership for Change, seeks to answer that question. It was prepared jointly by Professor Peter Drysdale, of the East Asian Bureau of Economic Research at the Australian National University, and Zhang Xiaoqiang, of the China Centre for International Economic Exchanges, with strong support from both governments.

Actually, our location on the edge of Asia is only half our good luck. The other half was discovering our island is rich in high quality, easily-won minerals and energy.

As a result, our economy has proved a fabulous fit with the re-emerging China. As the report explains, "Australia and China are deeply complementary trading partners".

Our "comparative advantage" is opposite to China's. A country has a comparative advantage in producing a particular item if it can do so at lower opportunity cost than other countries face.

"Australia has a large natural resource base relative to its population [so it] therefore specialises in the production of primary goods for export, and uses the proceeds to purchase labour-intensive and other manufactured goods," the report says.

"Conversely, China has a large labour supply, but relative to its population has smaller endowments of natural resources and accumulated capital. For this reason, China's industrial development was built on labour-intensive production, which it exchanges with Australia for imports of scarce resources."

And what a successful partnership it's been. In the space of not much more than a decade, China has become our biggest trading partner. It takes about 35 per cent of our exports of goods and services, and supplies almost 20 per cent of our imports of goods and services.

China is so big - its population is 56 times ours - and has been so successful in pursuing this growth strategy it's now the second biggest economy in the world (the biggest, if you allow for differences in purchasing power), the biggest trading nation and the world's biggest producer of manufactured goods.

But nothing stays the same. The resources boom that saw our trade with China grow so dramatically has reached its final stage. Prices for coal and iron ore have now fallen back.

The period of massive investment in new mines and natural gas facilities is ending, with construction spending falling sharply. The last stage is big growth in the quantity of our mining exports, with large increases in natural gas exports (mainly to China) still to come.

The boom was ended by big increases in the supply of commodities (from our competitors as well as us), but also by a slowing in China's demand as its need for more steel peaked.

So, after a period of huge expansion in our mining sector, our economy is making the adjustment back to normal, where most growth in production and employment comes from the ever-expanding services sector.

This is happening, with a few bumps. But, as part of its progress to full economic development, China is going through a much more dramatic "transition".

The report says China is "shifting its growth drivers from investment, exports and heavy industry to consumption, innovation and services".

"Chinese production is shifting from a model based on adaptation and imitation of goods, services and technologies developed elsewhere, to a model based on domestic innovation", it continues.

Part of this involves a shift from labour-intensive, low-tech, low-value manufacturing to more advanced, high-tech, high-value manufacturing.

This has already started. Over the 20 years to 2015, low-tech manufacturing's share of China's total exports of goods has shrunk from almost half to less than 30 per cent.

So the big question is whether, now China is changing direction, it will still be the gold mine it's been for us so far.

China will still need to import a lot of our natural resources, even if its demand for those resources won't be growing as fast.

The report has modelled three scenarios for our trade with China over the next 10 years. Drysdale stresses the results aren't exact, but give us an idea.

The "baseline" scenario, where existing trends continue without much change, would see our exports to China grow by 72 per cent, while China's exports to us grew by 41 per cent. (All these figures are in real terms.)

The pessimistic scenario sees China's annual growth falling below 5 per cent during the decade. Even so, our exports to China would grow by 28 per cent, while their exports to us grew by 20 per cent.

The optimistic scenario, however, would see our exports to China grow by 120 per cent, while their exports to us grew by 44 per cent.

And the catch? Both countries would need to engage in supply-side (production) reforms to make it happen.

For China, this would involve reforming its banks and financial system, reforming its state-owned enterprises, and liberalising the capital account of its balance of payments by lifting restrictions on money flows and allowing a freer-floating exchange rate.

For us, it would involve increasing competition in sheltered industries, openness to foreign investment and skills, and facilitating investment in social and physical infrastructure.

These are what we'd have to do to make real our dream of getting our share of all the extra demand for fancy food and services coming from China's by-then massive middle class.

Here we'd be battling against a different and much bigger range of competitors than we face in the commodities market. You wonder if our spoilt business people are up to it.

Wednesday, August 17, 2016

I have disturbing news. The big business people of Australia are feeling quite upset about the recent federal election, or so I am informed by The Australian Financial Review.

Quite frankly – and this is a shocking thing to say – the mood of the campaign was "anti-business". As young people say, big business was disrespected.

Those rotters in the Labor Party were shameless in their behaviour, seeking to win votes by portraying their Liberal opponents as apologists for big business.

Why did the Libs have cutting the rate of company tax as pretty much the only item in their plan for Jobs and Growth? Purely, so the voters were asked to believe, to please the Libs' cronies at "the big end of town".

Why were the Libs so vigorous in their opposition to Labor's idea of a royal commission? Because they were doing the bidding of their big four banking mates, Labor claimed.

Really, it was disgraceful. But perhaps even more depressing was the performance of the Libs.

Malcolm Turnbull, one of our own – and didn't those Labor people keep hinting at it – the man in whom we had such faith after Tony Abbott's failure as their longed-for messiah, has proved such a disappointment.

He may have championed a proposal to cut the company tax rate by a niggardly 5 per cent, but he wanted to string it out over a decade – a decade! With, mind you, big business not getting a penny until close to the end.

Talk about trickling down the trickle down. Surely if lower company tax is the big reform it needs to deliver jobs and growth, the sooner you do it the better. Be decisive. Take risks for the good of the nation.

But Turnbull lacked the leadership to increase the goods and services tax or to cut the top personal tax rate. Such a disappointment.

And he performed so poorly against Labor and the mushrooming populists – when could you ever accuse big business of trying to be popular? – he looks unlikely to be able to deliver on the company tax cut. Such a disappointment.

Then, to top it off, no sooner is the election over than Liberal loudmouths like Michael Kroger start blaming the Business Council of Australia for their poor performance.

The Libs went out to bat for big business, but we failed to back them with donations or ads. There's talk Turnbull had to pay for a lot of the campaign himself.

Well, really. It's not the business council's job to pass round the hat. The Liberals' job is to fight for the interests of big business purely in the national interest.

What part of "all care but no responsibility" do the Libs not understand?

And then there's the way the pollies suck-up to small business. All that bull about small business being "the engine room of the economy".

Yeah, sure. Say it enough times and the punters forget most of them work for big business, not small.

It couldn't be because small business has more votes than we do, could it? We could try telling our employees who to vote for, but I'm not sure we'd get far.

So politicians on both sides are a huge letdown. Why won't they show a bit of leadership? Why won't they put their jobs on the line in the national interest? Don't they think we would?

As for the voters themselves, big business is more in sorrow than in anger. How can you blame people for acting like sheep when they're so badly led?

There are so many crazy ideas abroad that the pollies have failed to scotch. Do you know there are people who think business should be paying more tax, not less?

There are people who can't see why business needs a tax cut when it's already doing such a good job of avoiding paying much. This is so unfair. Some of us do pay quite a lot of what we're supposed to.

The pollies' failure of leadership makes it hard to blame ordinary people for not understanding there's a budget repair job to do and we have to get on with it. There are "harsh realities" that must be faced.

Strong policy action must be taken and the public must be persuaded to take its medicine.

If the budget is to be balanced we all have to give up something. Businesses have already offered to give up some of the tax they pay, and now it's your turn to volunteer.

Government spending is growing unsustainably. Surely you could give up some of those free visits to the doctor. Surely you could pay more for your pharmaceuticals. Surely your pension doesn't need to be so generously indexed.

Someone needs to tell you this: all the talk of a royal commission is reducing confidence in the banking system. Stop it, or on your own head be it.

And lack of support for big business on both sides is sapping confidence in the economy.

I mean, really. With such hopeless politicians and foolish, self-seeking voters, how can big business to get on with its job?

The incompetence and unworthiness around us is so disheartening. It's all we can do to get out of bed each day and collect our pay.

Monday, August 15, 2016

The last speech of the retiring Reserve Bank governor, Glenn the Baptist, was a touch biblical. Whatever your point of view, you could find a verse here or there that seemed to back you up.

If, for instance, you accept the conventional view that the budget deficit is way too high, that the government should be more daring in seeking to cut the deficit, and its opponents should be less opportunist and more responsible in agreeing to spending cuts, Glenn Stevens offered a verse for you to quote.

He observed that "when specific ideas are proposed that will actually make a difference [to the budget deficit] the conversation quickly shifts to rather narrow notions of 'fairness', people look to their own positions, the interest groups all come out and the specific proposals often run into the sand.

"If we think this rather other-worldly discussion will not have to give way to a more hard-nosed conversation, we are kidding ourselves.

"That will occur should there be a moment of crisis, but it would be better if it occurred before then," he said.

A treasury secretary couldn't have said it better. But look at the totality of Stevens' remarks and he's actually challenging the conventional wisdom.

"As would be clear from my utterances over the past couple of years, I have serious reservations about the extent of reliance on monetary policy around the world."

The problem is that what central banks do could never be enough to fully restore demand after a period of recession associated with a very substantial debt build-up.

"In the end, the most powerful domestic expansionary impetus that comes from low interest rates surely comes when someone has both the balance sheet capacity and the willingness to take on more debt and spend," he said.

"The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt.

"In some countries there may be no safe way of [increasing] borrowing and spending because debt, both public and private, is just too high.

"In Australia, gross public debt, for all levels of government, adds up to about 40 per cent of gross domestic product. We are rightly concerned about the future trajectory of this ratio.

"But gross household debt is three time larger – about 125 per cent of GDP. That is not unmanageable – but nor is it a low number."

Get it? He's saying that monetary policy is out of puff. Lowering interest rates is no longer very effective in encouraging households to take on even more debt. (He noted later that he'd never believed cutting rates had much effect on businesses' decisions to increase investment spending.)

So which sector has the most capacity to increase its deficit spending "in the event that we were to need a big demand stimulus"?

The public sector. Sorry, but that's not what a treasury secretary would say.

Stevens was quick to add: "I am not advocating an increase in deficit financing of day-to-day government spending. The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances.

"It remains the case that, over time, the gap in the recurrent [my emphasis] budget has to be closed, because rising public debt that is not held against assets [my emphasis] will start to be a material problem."

Now that's something no secretary to the treasury would say. Unlike all its state counterparts, federal Treasury has long opposed the drawing of a distinction between government recurrent spending and government investment in "long-lived assets that yield an economic return" and add to national productivity.

Treasury wants little old ladies to feel as guilty about borrowing to improve the Pacific Highway as they do about borrowing for "routine government expenses".

So, let's worry about getting the recurrent budget back to surplus (as most state governments did long ago), but not about borrowing for infrastructure. Agreed?

Except that when you read the budget papers carefully enough to find the info Treasury has hidden on page 6-17, you discover that the expected underlying cash deficit for this financial year of $37 billion includes capital spending of $36 billion.

Get it? We're already back to a balanced recurrent budget. So why so much hand-wringing? And why aren't we getting on with planning the infrastructure pipeline we could expedite "in the event that we were to need a big demand stimulus"?

Saturday, August 13, 2016

The single best explanation for the rise of Mr Crazy, Donald Trump, is that over the four years to 2013, the real income of the top 1 per cent of American households rose by 17.4 per cent, while that of the bottom 99 per cent rose by 0.7 per cent, giving the top few 85 per cent of the growth.

Another country where the gap between high and low incomes has widened markedly is Britain. And what crazy thing have the Brit voters just gone and done? You remember.

I think it's a case of what physiotherapists call "referred pain" - what you feel in some part of your body is actually coming from a problem somewhere else.

Many voters are conscious that their income doesn't seem to be growing and know something's badly wrong. But they don't join the dots the way an economist would.

They look around for something or someone to blame. They turn against their political leaders, who are "out of touch". Which they may well be.

But, as has happened many, many times before, voters also focus their resentment on the new migrants around them, especially those of a different race or creed. These people are taking all the jobs (especially those the local don't want), or they're all unemployed and getting too much help from the government.

Australia, it turns out, has also been acting strangely of late, turning against mainstream politicians on both sides, voting for populist protectionists like the Xenophones​ and resurrecting Pauline Hanson and One Nation, with new improved conspiracy theories.

So what's been happening to the gap between the top and the bottom in Oz? It's been widening but, fortunately, not nearly as quickly as in the US or Britain.

The Bureau of Statistics conducts a survey of the distribution of disposable income (that is, after allowing for income tax paid and welfare benefits received) between households. It's conducted every two years and the latest was for 2013-14.

Household disposable income that year averaged $998 a week, but with households in the lowest quintile (20 per cent block) getting $375 and those in the highest quintile, $2037 a week.

It's obvious that, if income were distributed equally between all households, each 20 per cent block of households would get 20 per cent of the total income of households.

In fact, the lowest quintile's share of total income in 2013-14 was less than 8 per cent. The share of the middle quintile (those households between 10 percentage points below the median and 10 points above it) was 17 per cent.

But the highest quintile's share was 41 per cent - more than twice what they'd get if income was distributed equally.

That's proof of the wide gap between high and low incomes in Australia. It puts us above the average for income inequality among the member countries of the Organisation for Economic Co-operation and Development.

Even so, the bureau's figures show no significant worsening over the six years between 2007-08 and 2013-14 - the longest period in which its surveys can be compared on a consistent basis.

The most commonly used measure of the degree of inequality between households is the Gini coefficient - a scale running from 0, where income is equal between all households, to 1, where one household has all the income.

Our Gini was 0.34 in 2007-08 and 0.33 in 2013-14. You could call this a slight improvement, but I wouldn't - the change is too small to be taken literally.

Does that lack of change surprise you? It does me, especially as the Gini fell a little in the surveys of 2009-10 and 2011-12, before rising again in 2013-14. Huh?

Our base year of 2007-08 came just before the global financial crisis of September 2008.

Professor Peter Whiteford, of the Crawford School of Public Policy at the Australian National University, thinks the initial decline was caused by the Rudd government's big discretionary increase in pensions in 2009 and, on the other hand, the big fall in the sharemarket, which would have cut the incomes of higher income-earners.

Recessions usually hit the bottom of the distribution as well as the top by greatly increasing unemployment. But not this time because of the Rudd government's quick response and because the downturn's causes came more from the financial side of the economy.

Whiteford thinks the Gini's return to a more usual level in the latest survey is explained by the slow rise in unemployment in more recent years and the sharemarket's recovery.

But the stats bureau's practice of presenting the income distribution in quintiles tends to conceal an important development: the way income at the very top is growing much faster than it is even for people not that far from the top.

Economics professor-turned-politician Dr Andrew Leigh worked with one of the world's top experts in this field, British economist Sir Tony Atkinson, to develop a time series of movements in high incomes, based on data from the Australian Taxation Office. Leigh has handed it over to Professor Roger Wilkins, of the Melbourne Institute.

Wilkins' series shows that, between 1989 and 2013, the share of total individuals' income gained by the top 10 per cent of income-earners rose by 5 percentage points to more than 33 per cent.

But the top 5 per cent captured almost all of that increase. And the top 1 per cent claimed well over half the increase in the share of the top 5 per cent.

The top 1 per cent's share of total individuals' income is now 9 per cent. That is, their incomes average nine times what they'd be if incomes were equal.

Fortunately, this isn't nearly as extreme as it is in the US, or even Britain. But it does show Australia is moving down the same road as the others, suggesting the causes are international: technological change and globalisation.

Wednesday, August 10, 2016

How important is luck in monetary success? A lot more than a lot of successful people are willing to admit – even to themselves.

Is luck as important as hard work in becoming successful? No – but, in the end, yes.

These are important questions – we ponder them often – that economists rarely bother to study. Except for one of my favourite economists, Robert Frank, of Cornell University in upstate New York. His new book is Success and Luck: Good fortune and the myth of meritocracy.

The case for believing that success is due overwhelmingly to talent and hard work – something every successful person wants to believe – is simple. Leaving aside a few lottery winners and rich heirs, almost every materially successful person is someone with ability who's worked hard for what they've got.

But the weakness in that argument is equally apparent: the many talented and hard-working people who haven't amassed much wealth.

What separates the two groups is good fortune. Some talented and hard-working people have enjoyed the additional benefit of a lucky break or two, some haven't, or have suffered unmerited setbacks of one kind or another.

Some have had the good fortune simply to have avoided any misfortune. And, of course, there are talented, hardworking, lucky people who aren't all that outwardly successful because they haven't given material success a high priority. (Don't bother feeling sorry for them – they've probably enjoyed far more personal satisfaction than those who measure their worth in dollars.)

It's easy for us to forget how much our success is owed to good luck. Everyone living has been born into the world at its most prosperous point. Everyone born in Australia starts with an enormous advantage over most other people in the world, in terms of free schooling and healthcare, freedom to choose their own path and freedom from predation.

When we joke about the importance of choosing the right parents, we acknowledge the role of inheritance in influencing future success.

Even when our parents have no great wealth to pass on, a big part of intelligence is inherited and academic success is greatly influenced by whether your parents were readers and valued education.

I've long believed that the example set by parents produces hardworking children.

Frank has no desire to undervalue talent or discourage hard work. Of course they play a major part in success. Nor is he opposed to meritocracy, where jobs go to the most able candidate.

His point is just that, for success, talent and hard work are, as they say at university, "necessary but not sufficient". Those who "got there on merit" shouldn't forget the lucky breaks they've had.

"Chance events are more likely to be decisive in any competition as the number of contestants increases," Frank argues. That's because winning a competition with a large number of contestants requires that almost everything goes right.

This, in turn, means that even when luck counts for only a trivial part of overall performance, there's rarely a winner who wasn't also very lucky.

In the topical case of athletics, luck can come in the form of wind. It would be stupid to deny that anyone winning a world record in the 100 metres, the 100-metre hurdles, the long jump or the triple jump was both physically gifted and had done years of training.

But Frank notes that of the eight current world records (men's and women's) seven occurred in the presence of a tailwind and none with a headwind.

To show the importance of luck even when it's only a small factor, he uses a computer to conduct a numerical simulation.

Say there are 100,000 participants in a contest where luck counts for just 2 per cent of performance, with ability counting for 49 per cent and effort for 49 per cent. For each contestant, the computer draws a number at random separately for each of the three components of their total performance.

The computer repeated this game many times (just as repeated tossing of a coin brings the result closer to 50/50).

The average luck score of the winners was 90 out of 100. And 78 per cent of winners did not have the highest combined ability and effort scores.

But if luck plays such an important role in success, why do the successful so often want to deny it? Frank offers two explanations, one charitable and one not.

We downplay the role of luck so as to motivate ourselves to try hard. When I wish Year 12 economics students good luck in the exams, I sometimes add: "You know how to be lucky? Make your own. The harder you work, the better your luck."

But there's often another, less worthy reason for denying our debt to good fortune. We use it to sanctify our wealth and justify our reluctance to pay high rates of income tax.

I'm well off because I made the right choices, studied when I could have played, saved when I could have spent and worked damn hard. Those people in the outer suburbs are poor because they didn't work and sacrifice the way I did.

I earned all I've got and it's quite unfair to tax me extra to give handouts to people who're too lazy or undisciplined to do what I've done.

That's why it's so important for successful people to acknowledge their good fortune.

Monday, August 8, 2016

In case you haven't noticed, you're staring at the end of the era of economic reform. It has ended because it's come to be seen by many voters as no more than a cover for advancing the interests of the rich and powerful at their expense.

The evidence that the jig is up is all around us, in Brexit, Donald Trump and, at home, the near defeat of a government that went to the election with just one substantive proposal - to phase down the rate of company tax - which it sought to hide behind the empty slogan of "jobs and growth".

In the Senate we've seen the rise of the protectionist Xenophones​ and the resurrection of One Nation in even madder form.

To call the end of the reform era is not deny we'll still see the occasional policy proposal worthy of that name - such as Malcolm Turnbull's highly desirable changes to superannuation tax concessions and Labor's plan to curb negative gearing and reduce the capital gains tax discount.

But these have become exceptional events, hidden among the more numerous proposals to disguise rent-seeking as reform.

The economic reform era began in the early 1980s with Maggie Thatcher, Ronald Reagan and, of course, the Hawke-Keating government.

Many of those early reforms were unavoidable and greatly beneficial. America's airline deregulation brought an end to the cosseted flag-carriers and their unaffordable fares. Britain needed to end nationalised coal mines and other inefficiencies.

In Australia, we needed to open up our economy to the reality of a globalising world: to deregulate an inefficient and expensive financial system, float the dollar, phase out protection and move from centralised wage-fixing to collective bargaining.

But from such a promising start, now it's over. What brought the era to its ignominious end? Its noble goals were lost as it was hijacked by faulty ideology and vested interests.

The sceptical approach towards government intervention of the otherwise naive economists promoting reform left them susceptible to the smaller-government ideology - the belief that the private sector always does things better than the public sector, that government does too much and taxes are always too high.

This made them sitting ducks for the greedy rich - who cloak their greed in "libertarianism", while actually resenting being asked to subsidise the poor via taxation.

Economists were also the dupes of business people anxious to find ways of increasing their profits easier than the hard graft of price competition and struggling for market share.

They happily turned the provision of government services over to private firms. It never occurred to them that the private providers might cut corners on quality, exploit the naivety of public officials, find a way to get at the pollies, or lose all sense of restraint in their efforts to rip money out of the public purse.

After the long list of disasters in the field of outsourcing - the great private childcare collapse, the exploitation of foreign students by firms selling phony courses in return for permanent residence, the fly-by-night pink batt installers, and the near destruction of TAFE - the punters can tell something's badly wrong.

An early area of outsourcing was the replacement of the Commonwealth Employment Service with a network of charitable and for-profit providers of "employment services". Just wait for its inadequacies to be exposed when next we suffer a severe recession.

The outsourced provision of aged care is likely to be an ever increasing headache for governments.

Then there's privatisation, where too often governments have sacrificed the reformist ideal of increasing competition to increase efficiency on the altar of using existing or newly created monopoly power to enhance the sale price.

Why maximise sale price at the expense of consumers? Because of the obsession with debt levels and maintaining credit ratings. Faced with a choice between efficiency and the budget deficit, too many state treasuries have looked the other way.

A win for accountants over economists.

But the reformers' greatest failing has been the conceit that they look after efficiency and leave equity to lesser mortals: they ignore their reforms' effect on fairness.

At a time when technological change and globalisation are shifting the distribution of market income in favour of the top few per cent of earners, they're pushing "reforms" to make the tax system less redistributive.

And the very reformers who want freedom for some industries to expand while others contract have been happy to allow the rate of unemployment benefits to fall to almost a third below the poverty line.

Then they wonder why the punters decide something is badly off-beam and turn to soothsayers and medicine men.

Saturday, August 6, 2016

The trouble with the Reserve Bank's continuing cuts in the official interest rate – this week to another record low, of 1.5 per cent – is that it could leave people thinking the economy's in bad shape.

It isn't. As Reserve governor Glenn Stevens was at pains to point out, recent figures suggest that "overall [economic] growth is continuing at a moderate pace" notwithstanding a very large decline in investment in new mines and natural gas facilities.

In consequence, employment is increasing and unemployment
is, as they say in the financial markets, “flat to down”.

It's not brilliant, but it's not bad. Our economy is growing faster than most other developed economies. Nor is it expected to slow.

In which case, why is the Reserve cutting interest rates? Good question. Actually, it says more about the trouble other rich countries are having getting their economies moving than it does about ours.

The advanced economies – even the Americans – have still not recovered properly from the Great Recession precipitated by the global financial crisis of 2008.

The long boom that preceded the crisis involved a lot of borrowing by banks, businesses and households, partly to bolster living standards, but also to buy housing, commercial property and other assets.

When, inevitably, the credit-fuelled boom busted and asset prices fell back to earth, a lot of households and businesses were left with assets whose value no longer exceeded their liabilities.

Recessions that arise from such "balance sheet" problems always take a long time to recover from, as households and businesses cut their spending and investing in order to pay off their debts.

That was bad enough. But the difficulties were compounded by governments on both sides of the North Atlantic convincing themselves the problem wasn't excessive private sector borrowing, but government borrowing.

They not merely concluded they should do no further deficit spending, they embarked on the deeply misguided policy of "austerity", in which they tried to cut government spending and raise taxes at a time when the economy was already weak. Unsurprisingly, they made little progress in reducing deficits and debt.

This foolish fashion of forswearing the use of fiscal policy (the budget) to increase public sector demand at a time when private demand was weak threw all the task of restoring the economy's growth onto monetary policy.

From a position in most North Atlantic economies where official interest rates were already quite low, central banks cut their rates almost to zero.

When this did little to boost demand they resorted to the unconventional policy of "quantitative easing" – they bought bonds from banks with money they created with the stroke of a pen.

This was intended to lower long-term bond rates, which it did. But it did more to push up the prices of financial assets than to encourage increased spending in the real economy.

With QE doing little to help, some European central banks have even moved to negative interest rates – actually charging lenders a tiny percentage for borrowing their money.

If this sounds increasingly crazy, it is. But it's the world we and our central bank have to live in.

Historically, monetary policy was designed to keep inflation low. But it's a long time since many countries had to worry about high inflation. These days more of them worry about the opposite problem of "deflation" – continuously falling prices.

We, too, have very low inflation: an underlying rate of 1.5 per cent, compared with the Reserve's target range of 2 to 3 per cent.

This situation has led some to conclude the Reserve's reason for cutting the official rate this week was to help get the economy growing a lot faster, so inflation pressures would build and get the inflation rate back into the target zone.

That would make sense in normal times, but times aren't normal. Nor do I imagine the Reserve thinks a cut of another 0.25 percentage points (and less for people with mortgages) will make much difference to the strength of borrowing and spending.

So why did the Reserve feel it needed to cut by another notch? My guess is it had more to do with trying to reduce upward pressure on the dollar – our exchange rate.

The biggest effect of QE – creating more of a country's currency – has been to put downward pressure on that country's exchange rate. Meaning, of course, upward pressure on other countries' exchange rates – including ours.

Our dollar soared during the resources boom when the world was paying extraordinary prices for our coal and iron ore. It dropped back when commodity prices fell, but its return to more comfortable levels for our export and import-competing industries was impeded particularly by the Americans' resort to QE.

It eventually got down to the low US70¢s and the Reserve regards a lower dollar as a key element, along with low interest rates, in stimulating faster growth in our production of goods and services.

Of late, however, the dollar has drifted back up to about US76¢, which the Reserve regards as a retrograde step.

Get this: contrary to the easy assumption of some people, there's no simple, mechanical relationship between the level of our interest rates (or, strictly, the difference between our rates and those offered by big players such as the Americans) and the level of our exchange rate.

Even so, with no inflation problem in sight – and, indeed, with any fall in expected inflation leading to a rise in our real interest rate – the Reserve decided to err on the safe side by trying to reduce upward pressure on the dollar.

Wednesday, August 3, 2016

Sorry if I sound wide-eyed, but I was mightily impressed when I visited China as a guest of the Australia-China Relations Institute. Obviously, we were directed to the best rather than the worst but, even allowing for that, it was still impressive. Those guys are going places.

In a hurry. I was struck by how fast-moving the place is – in several senses. We argue interminably about getting a high-speed rail link, while the Chinese just get on with it.

We took the bullet train from Beijing to its nearest port, Tianjin, 140 kilometres away. So smooth you didn't really notice how fast it was going.

The government-run China Daily announced while we were there the plan to have 30,000 kilometres of high-speed track built by 2020. You could be sceptical – except they already have 19,000 kilometres installed.

Tianjin, admittedly a city of 11 million, has the newest, fanciest, most cavernous cultural centre and municipal buildings I've seen. I tried not to wonder how much it all cost and where the money had come from.

So many of us have outdated perceptions about China. It's a poor country producing cheap clothes and toys and knick-knacks in sweat shops.

That used to be true, and in parts of the country still is. But these days China is a middle-income country anxious to get rich gloriously.

In the Tianjin free trade zone is a factory for the European-owned Airbus. All the jetliners it produces are sold in China.

Of course, we tell ourselves, any technology they use has come from foreigners, sometimes without proper recompense.

Don't be so sure. We visited Shenzhen which, until 36 years ago, was a fishing village just across the water from Hong Kong, before someone made it a special economic zone.

I remember visiting it in January 1984 on a tourists' day-trip from Hong Kong. It was a dusty country town with a big new hotel for foreign visitors and a few factories, plus stalls selling stuff to tourists. I bought a Chairman Mao cap with a red metal star.

Today it's a city of 10 million, with income per person of about $29,000 a year. It has maintained 45 per cent of its area as parks and forest by the simple expedient of having housing go up rather than out.

It still has some low-end manufacturers, but they're being encouraged to move inland or to some south-east Asian country, such as Vietnam.

Land and wages in Shenzhen are too expensive for low-value production. Last year in China consumer prices rose by 2 per cent, while the average wage rose by 8 per cent.

So manufacturing in Shenzhen is moving to the high-tech end and the services sector now accounts for 60 per cent of its economy.

Its businesses put huge sums into research and development. In 2014 R&D spending accounted for 4 per cent of Shenzhen's gross domestic product. In Oz it's about half that.

BYD – standing for Build Your Dreams – is a private company founded in the city in 1995. It started out making batteries for mobile phones, but is now well advanced with the research and development needed to fulfil its "three green dreams" of making solar farms, travelling renewable energy storage stations, and electric vehicles.

It still makes and sells conventional cars, but is more interested in its range of hybrid and pure electric cars and buses. It's best known in Australia for its electric forklifts.

Many Chinese cities seek to reduce pollution by capping the number of new cars they'll register each year. Buy a hybrid or electric car, however, and you avoid the lottery.

Buy an electric SUV and the government gives you a subsidy of about $27,000, reducing the price of BYD's model to $47,000. The subsidy will be phased out as the company gains economies of scale.

Before moving to Shenzhen, BGI began life in 1999 as the Beijing Genomics Institute. It's now one of the world's largest genomic institutes, using gene sequencing to develop antenatal tests for genetic abnormalities and to detect diseases earlier.

It has more than 800 scientists working for it, and a wall showing the many covers of the journals Science and Nature celebrating its notable discoveries.

Huawei was founded in Shenzhen in 1987 by Ren Zhengfei, a former engineer in the People's Liberation Army. It started as a manufacturer of office PABX phone systems, but is now the largest telecommunications equipment manufacturer in the world.

It ploughs a minimum of 10 per cent of its revenue back into research and development, spending about $12 billion last year. The company is staff owned, with Ren's share down to 1.4 per cent.

It has installed Australia's largest private 4G communications network for Santos' mining operations.

In China it helped the Shenhua coal company raise the capacity of its Shuo Huang railway to 200 million tonnes a year. Its 4G system permitting synchronous control of multiple locos allows single train lengths up to 3000 metres long, carrying up to 20,000 tonnes.

China is big; we think of ourselves as small. China is confident, impatiently pushing towards a better future; we are fearful, waiting for more luck to turn up.

Monday, August 1, 2016

You've heard of belt and braces. You may even have heard of one country, two systems. But have you heard of One Belt, One Road? No, I thought not. Rest assured, you will.

It's a topic much discussed in business and economic circles in China, as I learnt on a visit there sponsored by the Australia-China Relations Institute at the University of Technology, Sydney.

It's a plan for the establishment of a new Silk Road between Europe and China, to increase trade and cultural exchange between all the countries along the route.

It's an initiative of the Chinese government, first announced by President Xi Jinping​ in 2013, and much elaborated since then.

The belt refers a land-based Silk Road Economic Belt running through China to Central Asia to Russia and Europe.

The road refers to a sea-based Maritime Silk Road taking in the countries of south-east Asia and running through the Indian Ocean to the countries of South Asia, then through the Suez Canal to the Mediterranean.

To keep muddling metaphors, the maritime "road" may even have a spur line to Africa. In principle, more than 60 countries could be involved.

It may sound like a politicians' grand vision that won't get far. That's certainly the way some American critics have reacted to it. There could be much suspicion, resentment and resistance to China's expansion plans from countries and their citizens, they say.

But while pollies talk big in Western countries, in China they tend to act big. Making the initiative a reality would involve much spending on infrastructure such as sea ports, airports, railways, highways, oil and gas pipelines, power stations and special economic zones.

China has much to gain from all this, of course. Its existing development activity in certain African countries suggests it would supply much of the materials and labour for infrastructure projects.

Should the oft-predicted economic "hard landing" eventuate and lead to rapidly rising unemployment at home, its desire to get on with foreign construction projects might be heightened.

Establishing a new Silk Road means China, already the world's largest trading nation, would greatly expand its export opportunities.

But trade between a willing buyer and willing seller is mutually beneficial. And increased trade could do much to hasten the economic development of the "stans" of Central Asia - such as Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan.

Already there is much interest and activity in Pakistan.

Geoff Raby, a former Australian ambassador to China, has observed that the initiative is "of great strategic significance for Beijing, as it is also intended to reduce China's major strategic vulnerability caused by so much of its seaborne trade, especially crude oil, having to go through the Strait of Malacca".

As an aside, this vulnerability also helps explain China's sensitivity over the South China Sea.

Full implementation of the initiative could take decades, of course. But a solid start has already been made. For instance, a freight rail link between the south-western China province of Sichuan (the one with the spicy food) and Lodz in Poland is now running three trains a week.

This fits also with the Chinese government's earlier - and continuing - Go West campaign to move economic activity - particularly labour-intensive manufacturing - inland from the richer coastal provinces, where labour is getting ever-more expensive.

But have you noticed something? The many countries that could get involved with the initiative include Indonesia, but not us.

At least, not directly. There is scope, however, for Australian banks and other financial institutions help facilitate the funding of infrastructure projects.

Much of the construction of projects will be done by big Chinese state-owned enterprises. We could, of course, sit back and hope this leads to restored demand for our coal and iron ore.

But the SOEs will often need to partner with foreign firms able to provide the specialist expertise they lack in in such things as engineering and major construction.

Many Australian companies are well-equipped to supply such consulting services, but to-date our firms have shown limited appetite for the higher risks involved in developing country projects.

Much safer to limit your innovation and agility to pressing the government for "reforms" that cut the tax you pay or allow you to drive harder bargains with your employees.

But not to worry. There are Japanese and South Korean firms who'll be happy to eat the Chinese lunch we don't fancy.